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The Bullion Report For October 5, 2011: Inflation Nation

Inflation has long been the bane of the average consumer budget but a boon to private gold investment. The 2-3 years of troubling economic conditions have created a unique mix situation that some analysts fear will feed price hikes. In fact, there are some observers who believe certain policies are doomed to create an era of hyperinflation. With so many concerns about inflation at home and abroad, it is time to take another look at this topic and the potential effect on gold prices.

Most investors should already be familiar with inflation basics. The ideal condition - according to most economists - is a low and steady rate of price increases. In a nutshell, they say that inflation is natural and healthy. This is fine and good, but right now there is an unprecedented build towards potential hyperinflation and that has been a very strong catalyst for higher prices in precious metals. This comes down to what I have discussed before: the systematic devaluing of the US dollar in an effort to promote/support/salvage the economy and try to stave off utter collapse.

The beginning of the economic crisis is officially recognized as 2008. However, there were a few spurts where news outlets made mention of economic recovery. Unfortunately, it seems like all of that was mere smoke and mirrors as some of the largest Western nations start to succumb to the enormity of their expenditures i.e. their giant hanging albatross of national debt. When we were in a boom time, the spending at a federal, state, and local level was bolstered by happy consumers with jobs, buying houses, paying taxes, and living the life. When all that went up in smoke during the crash of the housing market, all of that government revenue went "boom" too. Now, it looks like no one making the budgets got the memo, and they are now trying to bridge that gap. That looks to undermine domestic currencies even further, exacerbating inflation issues in some places.

When I say some places, that's because it isn't just the US economy that is fighting against the tides of rising prices. Sure, the average consumer here has fought to make ends meet while gas at the pump soared and that register at the grocery store kept ringing higher and higher, I don't dispute that. But we are not alone in this inflation fight. Some of the biggest issues are going on in those twin pillars of commodity consumption, India and China.

China's reported inflation rate in August was 6.2 percent. Compare this to 3.8 percent in the US. This is well outside their ideal level, and of concern to officials since that rate would limit their ability to react policy-wise if their economy falters amid poor global conditions. Basically, the US and Europe were not seeing as bad a level of inflation at the onset of the economic downturn, so they were able to crank up the printing presses, lower interest rates, and generally adjust policies (in some cases, almost overnight at emergency meetings) in an effort to keep things moving along or provide stimulus.

India isn't in any easier of a spot.

The central bank in that Asian nation has had eleven interest rate increases in the past year and a half in an effort to try to tame their price increases. This has kept the wholesale inflation rate just under double-digits - and more than doubles what is considered healthy. Despite strong economic growth, India risks falling into the same policy trouble-spot as China does if the global situation continues to deteriorate.

The Western Hemisphere has a trouble spot outside the US, too.

Brazil is fighting prices increases that topped 7 percent year-over-year. Their growth in the last decade has been phenomenal, fueled by strong export markets. Unfortunately, their price increases were spurred by an interest rate cut. Some observers feel the policy was loosened due to political pressures, but regardless of where it came from, most analysts feel it was a potential detriment to the domestic economic situation.

Summary

So what does all of this have to do with gold? Everything. This is an inescapable tie-in to the gold markets right now. Investors are juggling their risk aversion and no national stone will go unturned as they try to find good places to invest. The trouble is that battle is more about finding the best of the worst as currencies are deliberately undermined and growth grinds to a halt in many places. Gold and other precious metals will continue to be the standout options. They still offer a potential place for people to park assets to try to preserve them in an inflationary environment. Don't forget, these places battling higher prices are the same spots that saw a bump in the people with disposable incomes, a rise in the income of farmers when commodity prices boomed, and general growth that might even lead to a whole fresh group of willing investors with assets to preserve. If they can't do it in their own currencies, if the growth potential in the current global marketplace is dim, then gold and silver might be the ideal alternatives.

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.